Fraud at the Credit Rating Agencies - FDL

[WillyT]

Fraud at the Credit Rating Agencies
By: David Dayen Saturday April 24, 2010 9:46 am

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If we had a media that highlighted events in proportion to their importance to the nation, Carl Levin’s Permanent Subcommittee on Investigations would be plastered across every channel in the nation, including MTV. He has done some spectacular work on the financial crisis in a series of hearings, essentially morphing into the Pecora Commission, the 1930s-era panel which teased out the origins of the Great Depression and devised the recommendations that made banking and finance stable for 50 years and more.

Yesterday, Levin’s committee hosted an incredible hearing on the credit rating agencies, the “independent” analysts who assess various types of securities. During the financial crisis, the rating agencies, who are owned and funded by the very banks who create the securities they rate, simply gave up any pretense of independent assessment, rubber-stamping toxic assets as triple-A and safe, neglecting the very real dangers for investors and creating a false sense of security.

“Investors trusted credit rating agencies to issue accurate and impartial credit ratings, but that trust was broken in the recent financial crisis,” said Levin. “A conveyor belt of high risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on. The agencies issued those AAA ratings using inadequate data and outmoded models. When they finally fixed their models, they failed for a year — while delinquencies were climbing — to re-evaluate the existing securities. Then, in July 2007, the credit rating agencies instituted a mass downgrade of hundreds of mortgage backed securities, sent shockwaves through the economy, and the financial crisis was on. By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed.”

Fund managers needed top ratings to move their investments; in many cases, the entities with which they were doing deals, like pension funds or banks or insurance companies, were legally bound to have a safe AAA rating on the security. So they would basically pitch the rating agencies to give their products the seal of approval. Furthermore, the major raters – Moody’s, Standard and Poor’s and Fitch – competed with one another for business, and downgrading securities didn’t lead to repeat customers. And, the rating agencies didn’t have the resources or the methodology to really investigate things like the housing bubble. So for a variety of reasons, the rating agencies listened to the banksters and buckled under the pressure.

Levin’s committee produced 18 pages of emails from the rating agencies that shows some of the most obvious evidence of culpability that you’ll ever get. Let me just quote from a few of them:

“Version 6.0 could’ve been released months ago and resources assigned elsewhere if we didn’t have to massage the subprime and Alt-A numbers to preserve market share… We have known for some time, based on pool level data and LEVELS 6.0 testing that – Subprime: B and BB levels need to be raised; Alt A: B, BB and BBB levels need to be raised (we have had a disproportionate number of downgrades).” -Email from S&P employee, 3/23/2005

“We have spent significant amount of resource on this deal and it will be difficult for us to
continue with this process if we do not bave an agreement on the fee issue.” “We are okay with the revised fee schedule for this transaction. We are agreeing to this under the assumption that this will not be a precedent for any future deals and that you will work with us further on this transaction to try to get to some middle ground with respect to the ratings.” -Email exchange between Moody’s and Merrill Lynch, 6112107, Subject., “Re: Rating application for Belden Point COO.”

“Lehman is proposing an alternative way of calculating haircuts which I think has some merit Independent models are provided by several banks …. I must recognize that we do not have the knowledge nor the time to develop our own models.”
–Email from Moody’s employee, 12/05/2006

You will get sick reading through these documents. They show that the rating agencies knew about the imminent collapse of the housing market through financial fraud and subprime loans as far back as 2004. And they did nothing about it, and were lured into a game of chicken with the other rating agencies, where they all made money by not blinking and downgrading the securities tied to the loans. The revenue of the rating agencies doubled in this time, from 2002-2007. They essentially were being bribed.

...

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More: http://news.firedoglake.com/2010/04/24/fraud-at-the-credit-rating-agencies/

Levin's pres release: http://levin.senate.gov/newsroom/release.cfm?id=324129

:mad:

:puke:

[malaise]

1. I hope you know that those said ratings agencies have destroyed

entire economies of developing countries.

[WillyT]

2. Yep... Including Ours...

:shrug:

[midnight]

3. Why would investors trust the banks or their rating agencies?

"During the financial crisis, the rating agencies, who are owned and funded by the very banks who create the securities they rate, simply gave up any pretense of independent assessment, rubber-stamping toxic assets as triple-A and safe, neglecting the very real dangers for investors and creating a false sense of security."

[Phoebe Loosinhouse]

4. This is about as big as it gets.

The only thing propping up Wall Street and the financial markets in general is the belief by the general public that they are credible and objective.

I do believe that the eyes of the public will be opened as to how much a house of cards the whole system is. As a layperson I STILL will never understand how a system that allowed credit default swaps to put into play more money than exists in the world is deemed credible in the first place.

[Ghost Dog]

5. However, with the media you do have,

the majority will not notice a thing.

[WillyT]

6. Ain't THAT The Truth ???

:shrug:

:hi:

[kenny blankenship]

7. Everything is Enron.

We supposedly passed "tough legislation" so there would be no more Enrons, no more Arthur-Andersens (Sarbanes-Oxley).

Well, at least it was BIPARTISAN!

I was going to give Enron: The Smartest Guys In The Room to a nephew who was about to apply to business school. That was before the meltdown. Now the story of Enron's fraud seems almost quaint.